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A TEEATISE ON MONEY

BK. IV

increases the attractiveness of new investment, but atthe same time diminishes, other things being equal,the supply of money for the Industrial Circulation.

We conclude, therefore, that changes in the financialsituation are capable of causing changes in the valueof money in two ways. They have the effect of alteringthe quantity of money available for the IndustrialCirculation ; and they may have the effect of alteringthe attractiveness of Investment. Thus, unless thefirst effect is balanced by a change in the total quan-tity of money and the latter by a change in the termsof lending, an instability in the price-level of currentoutput will result.

The awkwardness is that the two possible effectsof a given change in the financial situation do notnecessarily pull in the same direction. Perhaps,therefore, we may be permitted at this point (inanticipation of topics which belong more properly toYol. ii.) an obiter dictum on the duty of a CentralBank which is endeavouring so to manage the mone-tary situation as to preserve a stable price-level of cur-rent output.

The dilemma before it—to take type (ii.) as ourillustration—is as follows. If the Bank increases thevolume of Bank-money so as to avoid any risk of theFinancial Circulation stealing resources from theIndustrial Circulation, it will encourage the “ bull ”market to continue, with every probability of a risingvalue of P' which will lead to over-investment lateron ; whereas if it refuses to increase the volume ofBank-money, it may so diminish the amount ofmoney available for Industry, or so enhance the rateof interest at which it is available, as to have animmediately deflationary tendency.

The solution lies—so far as the stability of purchas-ing power is concerned—in letting both Finance andIndustry have all the money they want, but at a rateof interest which in its effect on the rate of new